This may be old news to some of you, but I’m finally getting around to writing about it. In June 2014, the receiver in the Zeek Rewards Ponzi scheme case sued the infamous MLM lawyer Kevin Grimes (and his law firm) for legal malpractice, negligence and breach of fiduciary duty. The lawsuit initiated by receiver Kenneth Bell names Kevin Grimes and the law firm Grimes & Reese PLLC, and alleges damages of $100 million. (A separate lawsuit against Howard Kaplan also makes similar claims.)
The lawsuit alleges that Grimes knew or should have known that Zeek Rewards “…was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme.”
The Securities and Exchange Commission sued RVG Venture Group, LLC (dba ZeekRewards) in 2012, alleging that it was a $600 million Ponzi scheme (also called pyramid scheme). Of course, up until that point, participants in the multi-level marketing industry were claiming that ZeekRewards was a legitimate and legal MLM. (That’s what the lawyers said, anyway!) The company was forced into receivership later that year, with the receiver seizing assets to attempt to pay back victims of the scheme.
In addition to recovering assets and funds from Rex Venture Group, the receiver is attempting to recover funds from company executives and related entities. The receiver has begun clawback proceedings to try to recover funds from “net winners” in the scheme. Specifically, ten of the largest net winners in the United States have been sued for the return of the winnings from the scam. Each of them won more than $900,000, and the receiver alleges that because the winnings were a result of the participation in an unlawful Ponzi and pyramid scheme, the winners are not entitled to keep the funds. The winnings should be transferred to the receiver for distribution to Zeek victims. In addition, approximately 9,000 winners in the United States who won more than $1,000 each have also been sued, with the total winnings collected by those people in excess of $200 million.
As of late May 2014, the receiver held approximately $320 million in assets to be used to pay victims and administrative fees. The total damages to victims are estimated at approximately $650 million.
Grimes and Reese marketed itself as the “premier law firm servicing the direct sales industry.” Interestingly enough, Kevin Grimes has now disappeared and the law firm is no longer Grimes & Reese, but is now R&R Law Group. R&R Law Group includes Spencer Reese and David Richards, and THIS firm is now the “premier law firm servicing the direct sales industry.” Just a quick little switcho chango, and we can [maybe] hide the fact that Kevin Grimes and Grimes & Reese are being held to account for providing legal advice to an alleged Ponzi scheme. Poor little Kevin Grimes seems to be left out to dry and go it on his own.
The lawsuit against Grimes and the law firm alleges that during the time Grimes was legal counsel to Rex Venture Group / ZeekRewards (from January 2102 to August 2012):
By virtue of his knowledge of RVG and ZeekRewards and his legal expertise, Grimes knew or should have known that RVG was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme. Despite this knowledge, Grimes actively encouraged investors to participate in the scheme by creating a so-called “compliance” program that provided a false façade of legality and legitimacy and knowingly allowed his name to be used to promote the scheme. Grimes’ improper and negligent actions, which breached his fiduciary duties to RVG and assisted RVG’s Insiders to breach their fiduciary duties, caused significant damage to RVG. As described in detail below, Grimes is liable to RVG both for those damages and the profits he made from RVG.
The suit describes the “business” of ZeekRewards. RVG launched Zeekler.com in 2010. This was a “penny auction” website which offered items for sale. Unlike a normal auction in which bidders bid for free and bids continue until there is no higher bidder, the Zeekler auctions required users to purchase bids. Thus the auction costs the winner the winning price plus the cost of the bids, and all losers of the auction lose the money they paid to bid.
The penny auctions were not terribly successful, and in 2011 RVG launched ZeekRewards, an MLM scheme that falsely purported to pay a portion of profits from penny auctions to participant, and also paid affiliates for recruiting others into ZeekRewards. The lawsuit alleges that that the “bids” were just a way to get people to funnel money into a recruiting scheme. The auctions themselves made the company little money (approximately $10 million in retail bids) versus the $820 million selling ZeekRewards.
The suit goes on:
Grimes knew or should have known that insufficient income from the penny auction business was being made to pay the daily “profit share” promised by ZeekRewards. Grimes knew or should have known that the money used to fund ZeekRewards’ distributions to Affiliates came almost entirely from new participants rather than income from the Zeekler penny auctions.
It was or should have been obvious to Grimes that ZeekRewards succeeded because it promoted this lucrative “compensation plan,” offering large amounts of passive income to entice individuals to participate in the scheme. Grimes knew that
participants in the ZeekRewards scheme invested money in the scheme expecting that they would receive profits from the Zeekler penny auction or other Zeek efforts. Thus, Grimes knew or should have known that RVG, with his assistance, was promoting an unlawful unregistered security.
Finally, Grimes knew or should have known that the ZeekRewards compensation plan was paying Affiliates to recruit other Affiliates in an unlawful pyramid-style payment system. ZeekRewards openly referred to this system as the “Matrix.”
Simply put, Grimes knew or should have known that affiliates were rewarded merely for recruiting new investors without regard to any efforts by the Affiliates to sell bids or products or otherwise materially support the Zeekler retail business.
Why does any of this matter? The lawsuit claims that consumers were skeptical of ZeekRewards because the claims seemed too good to be true. It is alleged that Grimes and other legal counsel were enlisted to make the scheme look legitimate. How did they do that? According to the lawsuit:
Grimes helped in several ways. First, despite his knowledge that ZeekRewards was a fundamentally flawed and unlawful pyramid and/or Ponzi scheme and was selling unregistered securities, Grimes offered to create and did create a socalled “compliance course” specifically designed to encourage investors and potential investors to believe that if they satisfied the course then it would be a lawful enterprise. Thus, Grimes knowingly allowed Zeek to portray a false appearance of legality through his bogus “compliance” course.
Grimes profited personally from the compliance courses while allowing ZeekRewards yet another source of investor money. Upon information and belief, Grimes received payments from ZeekRewards not only for his legal counsel, but also for sales of his compliance course to Affiliates. Upon information and belief, Grimes provided the compliance course to ZeekRewards for $5 per affiliate, while allowing ZeekRewards to charge affiliates $30 each for the course, personally profiting from it and allowing RVG yet another means of extracting money from unsuspecting Affiliates.
Grimes allegedly wrote an email to an RVG advisor that said:
I am still in the process of getting my arms around its program, but I have some SERIOUS concerns that it very likely meets the definition of an “investment contract.” It may have other issues as well, but I’m still reviewing their documents.
Also, Grimes allegedly emailed Dawn Wright Olivares (a Zeek executive) that he got “several” inquiries a week from affiliates who were concerned about Zeek Rewards potentially being a Ponzi scheme. He asked Olivares if he should forward those emails or discard them. (Apparently responding to them was not an option?)
It is further alleged:
Also, beyond his “compliance courses,” Grimes further enhanced the legitimacy of the scheme by allowing his name and reputation as a self-styled legal expert on MLM and direct selling programs to be used in connection with the promotion of the program.
And, Grimes knew these Affiliates were relying on his implicit endorsement of the program. In an email to Dawn and Paul, Grimes wrote: “Because of my involvement in your conference calls, as well as the announcements on ZeekRewards News, quite a few of your affiliates and prospective affiliates have been attempting to contact me via email or phone. Most of the inquiries have been about the legality of ZeekRewards’ program.”
Grimes also edited and allowed his name to be used in a ZeekRewards promotional article in the Network Marketing Business Journal, which upon information and belief was distributed to tens of thousands of Affiliates and prospective Affiliates. As that article states: “Zeek hired . . . the leading direct sales law firm of Grimes & Reese as compliance attorneys.”
Noted multi-level marketing expert Robert FitzPatrick recently wrote that multi-level marketing companies are wolves in sheep’s clothing. Consumers are left to their own devices when trying to determine if “direct selling” and “income at home” schemes are legitimate. (Hint: They are almost always scams, no matter what new names are invented for them.)
Multi-level marketing companies always claim that they are “perfectly legal.” They hire loser attorneys like Kevin Grimes or MLM Attorney Kevin Thompson or Gerry Nehra (who has lawsuit problems of his own) to make them appear legitimate. These attorneys offer legal opinions (or maybe the appearance of legal opinions) that lull consumers into believing that these MLMs are legitimate business opportunities operating within the law.
The Grimes law firm provided legal services to MLMs such as Melaleuca, Herbalife, Take Shape for Life (Medifast), Usana and Donald Trump’s “Trump Network.” Even more interesting is this, written by Robert FitzPatrick:
[Unlike] most MLMs, Zeek Rewards was not a member of the official trade group for MLMs, the Direct Selling Association (DSA). However, Zeek’s lawyer/law firm, Grimes and Reese who administered the “compliance test” to Zeek recruits and helped to convince the public that Zeek was “legal,” was an award-winning member of the DSA. DSA affiliation through Grimes was an important element in disguising Zeek as “legal.”The DSA announced in 2010 that Grimes & Reese received DSA’s “Partnership” Award. The DSA award to Grimes and Reese was personally presented by DSA’s “Hall of Fame” winners. The DSA stated, “Grimes & Reese’s expertise in the industry is highlighted by the fact that in all of the major FTC pyramid scheme actions brought against direct sellers in the past decade the defendants have sought out their firm for representation. They have a truly unique understanding of legal expertise, marketing practices, compensation plan operation and industry ethics that enables them to provide legal services to direct sellers that other law firms simply cannot match.”In sum, Grimes, aka Grimes and Reese, world-famous in MLM for keeping MLMs out of jail or helping MLMs fight regulators. The DSA even gave them awards for this work. With his high-profile MLM credentials and award winning DSA-affiliation, Grimes became an important element of Zeek’s predatory and deceptive recruiting program, according to the court-appointed Receiver, as well as a major financial beneficiary of the fraud.